The KPMG case attempts to short-circuit the messy business of proving that a tax shelter is illegal by using the power of prosecution to target the tax advisers directly. And by cutting them off from the support of their firm through the threat of a death-sentence indictment of KPMG itself, the government seems intent on compelling the accused to cop a plea or settle the case, and so deny them their day in court.

The editorial says criminal charges are at best premature:

Whether a shelter qualifies as a tax deduction is, like any other point of law, adjudicated in court. But BLIPS, FLIP, OPIS and the other tax shelters in this case have never been brought before a judge, so their legality and legitimacy has never been settled as a point of law.
Never. The way tax law has usually developed in this country is that the IRS issues its point of view on a shelter, putting taxpayers who use it on notice. If the IRS then takes the taxpayer to court over the shelter, he has the chance to respond before a judge, who makes a ruling and precedents are thus established. In this case, the IRS has called in the prosecutors first.

By indicting the former partners, the Justice Department assumes a heavy burden of proving true criminal behavior, rather than overly-aggressive tax planning. It will be a disaster for tax enforcement if the IRS can’t back up the charges, especially considering the horrendous strain and legal costs to the defendants.
Where The Journal goes overboard is when it implies that, as a general rule, criminal charges shouldn’t be made until a shelter is ruled invalid by the courts. While it shouldn’t be easy to bring criminal charges, such a test would allow flaky shelters to run riot for years before they work their way through the courts. At what point would the Wall Street Journal allow injunctions against criminal behavior? After the taxpayers lose a Tax Court decision? After two Circuit Courts of Appeal rule against the shelter? Or only after the Supreme Court speaks?
While the Journal feels that the legitimacy of the shelters is still an open question, it’s worth noting that the law and accounting firms behind them seem to feel otherwise. Rather than defending the shelters, they are settling with their clients to the tune of hundreds of millions of dollars. That doesn’t mean the indictments are justified, but it does imply that the shelters themselves aren’t exactly ironclad.XELAN: A BAD EXAMPLE?
The editorial cites the Xelan case as an example of prosecutorial overreach:

Last November, Justice froze $500 million in assets at Xelan, a charitable trust set up for doctors in California, alleging that the trust was a vehicle for tax fraud. Six weeks later, the Federal Court for the Southern District of California threw out the case, noting, among other shortcomings, that the prosecutors could not show that any court had ever ruled that Xelan’s activities were illegal under the tax code.

The case that was thrown out was the attempt to freeze assets held in the shelters under attack. This week Xelan agreed to shut down and distribute its “sheltered” amounts to its clients. Xelan will aslo pay an additional $2.3 million to IRS, but without admitting wrongdoing. While it is a favorable settlement of the shelter investors — they only have their deductions recaptured now, rather than in prior years — it is also an indication that the shelter was vulnerable. (Quatloos.com has very thorough coverage) Given that the IRS ultimately shut the shelter down, it probably isn’t the best example of prosecutorial abuse for the Journal to use.WHAT ABOUT THE WILY AGITATORS?
It would be wrong for the Justice Department to bring indictments indiscrimately, and it will be a disgrace if that’s what turns out to have happened in the KPMG case.
Still, the Journal is wrong to imply that the IRS should not go after promotors:

As in the Xelan case, Justice has chosen in KPMG to go not after taxpayers, who under settled law are legally responsible for their own tax returns, but has instead targeted those offering shelters.

Abraham Lincoln said in another context, “Must I shoot a simple-minded soldier boy who deserts, while I must not touch a hair of a wily agitator who induces him to desert?” Just as the poor soldier boys did get shot, the IRS is going after shelter investors as well as promotors. To allow an abusive shelter-promoter to continue to get taxpayers in trouble while the cases crawl through the court system just gets more taxpayers in trouble. Whether the charges in the KPMG indictments were justified is debatable; but to imply that shelter promoters in general should be left undisturbed makes no sense.

The IRS death match with Xelan, the bankrupt San Diego insurer, appears to be at an end. Xelan had sold “supplemental disability” policies that the IRS said were really just tax dodges. The insureds — doctors were the target market — were told that they could buy deductible disability insurance in whatever amount they desired to reduce their taxes; the “premiums” were to be invested and returned to the doctors at retirement.
An IRS press release reproduced by Tax Analysts (no link yet) (now there is) says that the company will have to distribute $500 million to its “policyholders” as a taxable distribution; Xelan’s receiver, Doctors Benefit Insurance Company, will have to withhold federal taxes on the distribution.
The Associated Press account reports that the insureds will not have their initial deductions for the “premiums” disturbed. That makes sense, considering that they are taxable now.
Doctors Benefit will also make a $2.34 million payment to IRS, but admits no wrongdoing.
At one point the IRS attempted to freeze the $500 million, but was rebuffed by a federal judge. Aureus Group, a Des Moines insurance company, was dragged into related litigation.
Link: Complete Tax Update Xelan coverage.

Here are documents relating to the Xelan case heard in the U.S. District Court in Des Moines. I hope to get a copy of the 23-page Magistrate’s report tomorrow.Judge’s order accepting magistrate recommendations issued February 7, 2005.Joint Status Report issued February 28, 2005 on negotiations between AmerUs and IRS on production of documents in compliance with the February 7 order.
The Joint Status Report says that a plan has been outlined and a “production schedule” has been determined. The next status report is due at the end of April.
UPDATE: Here is the Magistrate’s report.

Posted in Xelan | Comments Off on XELAN DOCUMENTS FROM IOWA DISTRICT COURT

U.S. District Judge Ronald Longstaff has denied an attempt to prevent enforcement of an IRS summons seeking information from a Des Moines life insurance company as part of a tax shelter investigation. Xelan, a now-bankrupt California organization which sold tax-related services to doctors, had sought to prevent AmerUs Life Insurance Company from complying with an IRS demand for names of doctors who had purchased AmerUs policies as part of Xelan tax plans.
IRS enforcement efforts against Xelan suffered an embarrassing defeat in December when the IRS had to release $500 million in frozen assets from Xelan investment plans. This new courtroom victory keeps the IRS investigation alive by enabling the IRS to investigate doctors directly as part of its attack on abusive tax shelters.
We are obtaining a copy of the court documents and will post them. If you are a Tax Analysts online subscriber, they are available in Tax Base today.
Prior Tax Update coverage of Xelan may be found here. Quatloos also has more on Xelan.

The Justice Department went after xelan, Inc. with both barrels, freezing over $500 million in investment accounts with great fanfare. xelan offshore marketed tax-savings arrangements to physicians.
The Justice Department promptly lost a critical court ruling and the assets were unfrozen. Now the Justice Department has quietly withdrawn its lawsuit, slinking away in embarassing defeat.
The Quatloos website says the department will now probably go after the participants in xelan’s plans, rather than go after xelan itself:

Of course, as Yogi Bera would say, "It ain't over until
it's over," and probably the next step will be for the
IRS to start assessing some of the xelan participants,
but that gives xelan the chance to win
physician-by-physician, instead of (as the DOJ hoped)
lose en masse.

In the interim, this is a stunning defeat for the DOJ,
which is admitting defeat (at least for now) by
voluntarily dismissing its injunction action. But anybody
who thinks that the DOJ is permanently going away is
crazy. Some very bright and experienced minds in
Washington will lick their wounds for a couple of
weeks, and then settle on a new strategy. So stay
tuned

TaxGuru.com reports that Xelan, under attack by IRS as an abusive tax shelter for doctors, has won a round in court. TaxGuru quotes a press release saying that a receivership imposed earlier on the Doctors Benefit company has been dissolved. He has links to documents in the case.
Prior coverage here.
The San Diego Union Tribune also has a story. This procedural victory doesn’t get Xelan out of the woods, but it does allow its customers access to their accounts.UPDATE: the Doctors Benefit lawyers sent us the same press release. Click “read more” to see it. The IRS will be hugely embarrassed if they don’t prevail on this one.

Once again the IRS has felt it appropriate to issue a friendly reminder to the medical profession to comply with the tax law: a “fact sheet” on Taxes and the Medical Profession.
The fact sheet starts by reprising the sad story of Xelan, a company in hot water for involving hundreds of doctors in alleged tax scams. It also has this friendly chart showing prosecution and conviction stats for tax crimes by medical professionals, including average jail time:
And there is this friendly note: “In addition to criminal cases, IRS has thousands of taxpayers in the medical industry under audit.”
This is the second “fact sheet” the IRS issued for the medical profession. As far as we know, the IRS has yet to issue fact sheets for lawyers and accountants.

A reader points to this New York Times story about the IRS freezing $500 million of assets belonging to 4,000 + doctors and dentists. The assets were in “abusive tax shelters” run by Xelan, a San Diego company.

About 4,000 doctors and dentists
across the nation bought tax-reduction
plans in recent years from the company,
Xelan, evading $420 million in taxes,
not including interest and penalties,
a statement from the Justice
Department asserted.

The story says Xelan is under investigation for operating a bogus charity….

One focus of Justice Department
scrutiny is the Xelan Foundation,
which was set up as a charity that
allows the donors - and not the
charity - to decide how their
contributions are to be used.
The government contends that the
foundation, which is registered with
the I.R.S., operated as an abusive
tax shelter. The Justice Department
said it found 29 instances of the
foundation's accepting pretax
contributions from doctors and
dentists, who then used the money for
their children's college tuition.

…and a bogus disability insurer:

Xelan told doctors that they could put
up to 100 percent of their income
tax-free into the supplemental
disability plan. Legitimate payments
for insurance are tax-deductible.
Xelan told the doctors that their
contributions were tax-free for seven
years, after which they would owe
taxes on the principal and gains.

The I.R.S. maintains that the plan was
not insurance but a taxable
deferred-compensation program. The
$505 million in Vanguard accounts was
from the insurance plan, a Justice
Department lawyer said.

The moral? The old one – if it sounds too good to be true, in probably is. And don’t trust companies that start with “X,” perhaps.